To an extent, you're correct... the new Mercedes are not as good as the W140s, 126s, 116s, etc., but there's a lot of variation between the various models, too. Between myself, my parents, and my grandparents, we've had every S-Class chassis from a 1967 250SE to a 2003 S600. The 600 seems to be much higher quality than the '00 S500 my grandparents had before it, but it's still not quite as good as their '94 S500 or my '86 560SEL... the 600 comes pretty close, but it's still not quite as good.
I think it's mainly the cheaper models that have suffered a loss of quality (although, as I said, even the 600 isn't quite up to the standards of the older 500s/560s). For example, my grandparents also had a '97 or so ML320, which was a decent car, but an awful Mercedes, if that makes any sense. It was pretty well built, had decent reliability, etc., but it was not up to the standards set by the W140, 126, or older cars.
Whether Cadillac was the standard of the world during the '20s and '30s is debateable. Their V16 was impressive, but I don't think that even then, they were as good as the Mercedes of the time. The only American company to ever produce a car that rivaled Mercedes was Dusenberg, IMO. Packard, Cadillac, and Lincoln all came close during the '20s thru the early 50's, but (excepting right after the war, when Mercedes was nearly totally destroyed) they never matched Mercedes. And it's only gone downhill since then. I refuse to take Cadillac or Lincoln seriously until they produce a halfway decent sports sedan. So far, neither has managed to do that. The CTS-V may be one, but since AFAIK
, they're not on sale yet, for right now, it doesn't matter.